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How To Protect Your Business in a Divorce Action

“I’m going through a divorce and its getting nasty,” said the next generation leader of a family business.

“I’m sorry, “ said the consultant. “Have you got a good lawyer?”

“Yeah,” said the distraught young man, “and she wants to speak to you.”

“What’s the problem?”

“Well, she’s claiming that I own a chunk of the business, along with my siblings and Mom and Dad.”

“Well, your parents have talked about transferring stock to the four of you, but they haven’t done it, have they?”

“No, they haven’t. But because all of us are paid equally, her lawyer is claiming that at least part of our compensation actually is dividends. They’re threatening to go to the IRS. And that’s not all. They are auditing the company and turning up all of the expenses I put through the business and claiming that all of that is income which should be included in her alimony calculation.”

Unfortunately, the circumstances described above are all too common. Family business’ unaffected by divorce are becoming increasingly rare.

Unleashed divorce attorneys can have a field day in your books and twist you in the kind of knots that make it awfully tough to run your business.

To protect yourself against such a possibility, run your business as a business and carefully maintain the boundary between business and family finances. Nothing substitutes for a meaningful compensation policy and process, a well-crafted and executed estate plan, and proper accounting for all business expenses. Without them, your chances go up for costly and potentially devastating family conflicts, legal battles or IRS actions.

“You’ve got a real mess on your hands,” the consultant said. “Focus on running your business in the best way possible. It is past time to clean up your act---personally and as a family business. It is an expensive lesson you are learning---put your painful experience to good use.”

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